Providers Redefine HRO Model

Buyers aren't the only ones who have learned a thing or two as the HR BPO market has matured. Service providers have had to learn—some the hard way—that the business model they used in many of the earliest HRO deals was never going to be sustainable.

This "lift and shift" model called for the provider to take on all of the client’s HR process as they were and provide the services more cheaply.

The problem with this arrangement is that there often was no discussion between the buyers and providers about goals or metrics, experts say. The whole arrangement was about cost-cutting, and nothing more.

"Before, there was no discussion. We would just take on all of the processes," says Jim Konieczny, division leader for BPO at Hewitt Associates.

As a result, providers like Hewitt, which inherited a number of lift-and-shift deals when it acquired Exult in 2004, ended up with dozens of clients with different HRO models in place, and no standardization. "I can never make that model work," Ko¬nieczny says.

And no HR outsourcer has learned this lesson more profoundly than Hewitt.

The Lincolnshire, Illinois-based company has struggled with its HRO business the past few quarters.

As a result, the company is being more selective about what kinds of clients it takes on and is making sure that it has clearer discussions with prospective buyers about what they will be responsible for and what Hewitt will do.

"Before, there was no discussion. We would just take on all of the processes. I can never make that model work." --Jim Koneiczny, Hewitt Associates

At the same time, Hewitt is renegotiating its lift-and-shift contracts, representing one-third of all its deals.

"I am knee-deep in these conversations and they aren’t easy," Konieczny says. But clients are open to the discussions and realize that to make HRO deals work, buyers and providers both have to address changes in their own businesses that will facilitate the HRO arrangement, and that isn’t just about cost-cutting, he says.

Previously, Hewitt might have agreed to take on a client that had 270 forms it sends to employees, for such things as benefit change requests, payroll change requests and new-hire processes, without analyzing whether some forms could be eliminated or standardized, Konieczny says. That’s no longer the case.

"Now we will look to improve the process before we take it on," he says. Specifically, Hewitt will talk with buyers about how processes can be improved on the buyer’s side before an HRO contract is signed.

Although Hewitt might be the most high-profile example of a provider making this transition, such negotiations are happening among a number of providers and buyers, experts say.

As a result, some providers are starting to ask buyers to pay 50 percent to 100 percent of the first year’s fees upfront, says Michel Janssen, research director at the Hackett Group, an Atlanta-based advisory firm. Providers are doing this so that they have the money in hand as they enter the contract, rather than absorbing the upfront costs and then getting paid. A few years ago, this was unheard of, he says.

The result of all of this change ultimately will be that HR BPO deals will take longer to come to fruition, Janssen says.

"There might be a slowdown in the number of deals coming to market as buyers’ expectations recalibrate," he says.